Local Governments in Chile*
Leonardo Letelier S.**
Abstract
This paper examines the structure, functions and sources of funding of Chilean sub
national governments. Whilst all these aspects of local governments are addressed
comprehensively, the emphasis is put on the type of grants being transferred from high to
low levels of governments. They can be classified into three categories. The first one
refers to those resources being assigned to the funding of public school level education
and primary health, which have been known as “delegated functions” since the
significant fiscal decentralization process implemented by the beginning of the 80s . The
second group is made up of a myriad of specific funds on which municipalities have a
rather limited degree of maneuver. They clearly fall into the general frame of categorical
grants, being mostly assigned to “Social Aid and Local development”. The third group is
that given by the central government to the intermidium (regional) level of government in
the form of investment grants. Approximately 50% of these funds are non categorical in
the sense of being autonomously assigned by the regional governments. It is concluded
that the Chilean structure of funding of sub national governments is still very centralized.
The permission to issue debt on the part of municipalities and the consolidation of
categorical grants into block grants are two clearly Pareto improving reforms for the
current structure.
*
This work was done for the Local Governance Project directed by Anwar Shah of the World Bank
Institute and financed by the Netherlands Government.
**
Institute of Public Affairs, University of Chile.
1
1. Introduction: An overview of the current local government system.
A Brief Historical Review.
The Chilean version of the lowest level of government (municipality), was originated in
the colonial town councils1, which came into existence in Santiago right after the
foundation of the capital city in 1541. They represented the last chain in the colonial
administrative structure. The functions they performed included the maintenance and
improvement of public facilities and hospitals, the adornment and decoration of public
spaces, the control of the artisans union, the administration of justice and the local militia.
Similarly to other Spanish colonies at the time, these functions were rather broad.
However, they were substantially curtailed as far as the administration of justice is
concerned as a result of the creation of the “Real Audiencia” in 1606. This was the
tribunal that administered justice in the Spanish colonies before they became
independent.
A significant landmark in the development of the Chilean municipal system was the
impulse given to it by the constitution of 1833, which explicitly established that “there
should be one municipality in all departments´ capitals and in those settlements in which
the President so decides” (Martner, 1993). Whilst municipalities were assigned very
specific functions, they were subject to the governor’s authority. Such a centralist
tendency experienced an important revision in a new municipal organic law enacted in
1887. This law deprived the central government and its representatives from most of the
attributions in the municipal field. Nevertheless, the central government continued to
intervene in the municipal elections until 1891 when the “Law of the Autonomous
Community” was passed. The constitution enacted in 1925 established that municipalities
were subject to the surveillance of the provincial assemblies. Moreover, although the
municipal mayor would be freely elected by the local residents, mayors of highly
populated cities could be assigned by the president of the country.
The next breakthrough in the history of Chilean Sub National Governments was the
establishment of twelve “Regions” and one Metropolitan Area in 1994. Although at that
time all sub national governments’ authorities were appointed by the central government
in a fully discretionary way2, this administrative reform came to be the starting point of a
deep process of fiscal decentralization in the years to come. As far as municipalities are
concerned, they were delegated important new functions in 1980. That was the case of
the of primary health and school level education as well as the administration of
important social subsidies intended to target the poor through a “focalized” approach
immersed in the spirit of the subsidiary role of the State. Municipal governments were
seen closer to the population in need and more able to identify the type of local public
goods they would require.
Both in the case of health as well as in education, municipalities were empowered to
chose among two alternative administration structures. The first one consisted in the
1
2
“Cabildos” in the Spanish literature.
The Chilean Military Government spanned between 1973 and 1989.
2
direct administration through administrative departments of health and education. The
second alternative consisted in leaving the administration of schools, primary health
centers and commentaries in the hands of a private corporation. They would be non profit
organizations being run by a board headed by the local mayor. The remaining members
would be representatives of other local state organizations and the private sector. The
advantage of the corporation lies in its more flexible legal status which avoids the control
being made by the treasury inspector's office. The only formal control on it is made by
the municipal council on account of the contributions made by the municipality in
addition to the funds being directly transferred to the corporation from the central
government. The corporation option was only taken by 53 municipalities before the
constitutional court decided in 1981 that municipal competencies being held since 1980
could not be performed by private organisms.
As far as regions are concerned, they are headed by a centrally appointed regional
governor, who is advised by the remaining members of the Regional Council (CORE).
With the exception of the governor himself, all members are indirectly elected through
the municipal councils. Each province is given the benefit of choosing two advisers, with
a maximum of ten representatives in provinces with less than 1.000.000 inhabitants and
14 advisers in provinces with a higher population. Municipalities have a mayor who is
the head of the Municipal Council, all of them elected by the local constituency.
Although Provinces were maintained as a reminiscence of the old – pre regions –
structure, they are just coordinating offices of central government’s deconcentrated
services. Chile is formally a unitary country organized into 12 regions and one
metropolitan area, 51 provinces and 341 municipalities.
2. Local governments responsibilities.
Chilean regional governments have multiple functions. All of them may be considered as
agent tasks of the central government. Every region is meant to design its own long run
development plan, which has to be compatible with the guidelines being given by the
central government. From the view point of regions’ fiscal autonomy, their most
important function is the making of a ranking of feasible regional investments projects.
This is assumed to capture local preferences as far as new public infrastructure is
concerned. Selected projects are funded through various decentralized funds made
available by the central government. This process is technically supported by the
Regional Undersecretary of Planning (SERPLAC), which is a deconcentrated branch of
the Ministry of Planning (MIDEPLAN), and the CORE itself. Regional governments
should also look after the well functioning of local public services, the promotion of local
economic activities, the correct implementation of norms related to the environment and
the public transportation and the encouragement of culture and social development. In all
functions other than defining the final destiny of decentralized investment funds, the
regional government coordinates and goes deeply into the implementation of national
policies at the regional level. In the promotion of local economic activities, the regional
government defines priorities in terms of sectors being favored, stimulates regional
tourism and encourages scientific research in its territory. As far as the social and cultural
areas are concerned, the regional government defines the aims in a wide set of issues,
which includes poverty reduction plans, inter municipal distribution of funds and
3
encouragement of regional-related cultural activities. Whist the provincial level just
coordinates delegated services of the central government, its supervising power and
degree of influence on the allocation of regionally decided investment funds were
significantly expanded in 2002.
As far as municipalities are concerned, they have six exclusive and thirteen non exclusive
functions. Local governments are allowed to execute complementary activities with other
levels of government and public or private external organisms (ANNEX 1). With the
exception of points 3 and 6 in ANNEX 1, the municipal level has an important role in the
enforcement of general norms on the construction industry, urbanization and
transportation. It is however among the non exclusive functions in which municipalities
find wider and a more flexible range of potential activities to develop. Two functions
being delegated to municipalities in 1980 are the administration of school level education
and primary health centers. On account of them, municipalities are assigned significant
categorical grants. Municipalities are also a fundamental part of the State social welfare
net. Although they do not finance social benefits, they play a fundamental role in the
administration of funds and the identification of beneficiaries.
3. Local governments’ own taxes and charges.
Chilean municipalities are the only tier of sub national government allowed to tax its
residents and also charge for the services they provide. It should be said that the
normative power they have to define on rates and introduce new taxes is very limited.
The most important municipal tax revenue in Chile is the Property Tax. This is applicable
at a fixed rate that ranges between 1.2 and 2.0 % on the fiscal value of rural and urban
properties. Nevertheless, the law establishes numerous tax rebates and overcharges. A
second important local tax is the one on car licenses. Since this is payable in any
municipality regardless of the car’s owner resident, municipal governments actively
compete to .attract potential tax payers. The tax rate in this case is uniform across the
country and it depends on the car value.
Regarding local charges, there exists a business license being paid on commercial
activities undertaken in the municipal area. In this case, municipalities have an important
degree of maneuver in the establishment of the rate being paid. Organizations related to
charity, religion, culture, self assistance, fine arts, non professional sports and promotion
of community interests are exempted from this payment. Other municipal charges are the
ones on garbage collection, urbanization and construction permissions, occupation of
public spaces by private activities, removal of street debris, installation and construction
of various kinds of local public spaces, street publicity, drivers´ license delivery, transfer
of vehicles and mobile street traders. In some cases, water supply resources belong the
municipality, in which case this is also locally charged. Whilst the law establishes some
limits and exceptions to the payment of these duties, municipalities have a rather wide
range of maneuver to fix the rates they charge. In a third category of revenues we find a
myriad of small sources. This includes traffic fines, payments for commutation of
sentences, interests and rents on assets being owned by municipalities, income from the
sale of confiscated goods and other similar items. Also in this category is included the
4
revenue from privately administered municipal real state, as it is the case of municipal
beaches and other recreation areas.
Concerning borrowing, local governments are not allowed to get loans of any kind. The
reason for this probably lies in the deep concern to keep control on the national fiscal
balance in light of the long and dramatic period of fiscal adjustment over the second half
of the 70s. Despite this being a long past historical episode, it certainly remains a factor
worth considering in the current administration of the State. Interestingly enough,
municipal governments do borrow in practice. In the fist place, they very often delay the
payment of wages and other labor related benefits to schools teacher and primary health
centers´ officers. Secondly, payment of contracts and other inputs currently purchased by
local governments have been also postponed in some cases. Last but not least, leasing
type of contracts abound between municipal governments and private providers 3. All this
has made such a prohibition a rather inapplicable norm. Some future, albeit still shy
reforms in this regard are now being considered.
Whilst regions have no taxes of their own, the law explicitly assigns them an “equivalent
amount” to the revenues being collected from regional mining licenses. By saying that,
the law circumvents the constitutional prohibition of having hypothecated taxes that fund
specific geographical areas or particular activities4. As opposed to local business licenses
being charged by municipal governments, of which all revenues are left for the
corresponding municipality, the law on mining licenses establishes that 70% of the total
being collected should be added to the share of National Fund of Regional Development
(see below) assigned to that region where the tax was generated. The remaining 30% is
given to those municipalities where the specific mining activity is located.
4.
The structure of sub national governments financing. An overview.
Table 1 provides an overview of the current structure of financing. Since only
municipalities have revenues of their own, this is the only tier explicitly referred to.
Regions’ share is being captured through their participation on decentralized public
investment grants. As regards municipalities themselves, their net of grants budget is in
the range of 8.5% of general governments revenues, of which 70% comes from local
taxes. Municipal taxes occupy more of the 75% of the total budget. When all grants are
considered, a measurement of total decentralized funds (TDF) shows that roughly 30% of
the general government’s budget is transferred to lower tiers of governments.
Three types of grants are clearly identified. A first type is meant to cover the expenses
from publicly supported schools and primary health municipal centers. As it was
referred to above, these two areas of State action were handed over to the municipal
level in 1980 and they may be gathered into the label of “delegated functions”. It should
be said though, that more than 40% of the educational subvention is given to publicly
supported private schools. This is pointed out in Figure 1 by showing that regardless of
3
Estimated Chilean Municipal Debt is about 9% of the whole national municipal budget.
The Constitution allows exceptions to this rule in the case of taxes explicitly collected to finance expenses
of well defined sub national governments functions. This is the case of municipal property tax.
4
5
the decentralized nature of the public school level subvention, not all of it goes through
the municipal administrative structure, being partially granted to private school
“sustainers”5. A myriad of complementary categorical grants to which schools should
apply on a competitive basis are also available (see section 6.2). As regards primary
health, its funding is made up of two parts. One is a population based grant (see section
6.2), and the second one is a supplement to attend idiosyncratic health characteristics of
each municipal area. While education and health related transfers represent about 62% of
all grants (Table 1), school subvention itself occupies – on average- more than 75% of
the resources on account of these two delegated functions.
Since municipalities are deeply involved in the administration of most State social
welfare programs, a second group of grants is represented by a wide range of subsidies
and local development funds. They are conceived as a part of the general approach to
“focalize” social aid in order to reach the poorest population. Similarly to the cases of
school education and primary health, this second category is made up of purely
categorical transfers. Despite these grants being given directly to beneficiaries (Figure 1),
municipalities provide administrative support and generate the information needed to
implement these aid programs. They roughly represent 15% of all sub national
governments grants.
Finally, investment funds may be grouped in a third clearly distinguished category. As it
can be seen from Figure 1, the primary distribution of these grants is a regional
responsibility. In most cases this level also decides on the allocation of funds among
investment project. However, there is a share of these grants which is distributed by each
region among municipalities, being this last level of government the one that finally
decides on the investment projects to be made. Decentralized investment funds currently
represent almost 23% of all grants. As it can be seen from table 1, they are the item with
the highest proportional increase between 1999 and 2004.
Separate mention deserves the redistribution fund called “Common Municipal Fund”
(FCM), which redistributes revenues from rich to poor municipalities. While this is the
most controversial aspect of the current municipal financial structure (see section 6.1), it
partially levels off the existing huge differences across municipal governments as far as
their sources of locally generated revenues are concerned. Approximately 37% of all net
of grants municipal revenues are redistributed through this mechanism (section 6.1).
From the view point of the degree of maneuver held by sub national governments to
allocate grants, most of them can be defined as categorical ones. On one extreme we have
grants on social aid and local development, in which case municipalities merely identify
and get in touch with beneficiaries, having no role in deciding the type of subsidy to be
given. As opposed to this previous case, both the subvention to schools as well as the
primary health attention grant are physically transferred to local governments. Although
municipalities are committed to use this funding on this two specific purposes, local
authorities very often delay the actual payment of expenses derived from these delegated
5
Sustainers are the school administrators. They may be either private or municipal ones. Each sustainer
usually administers various schools.
6
functions. A slightly higher degree of freedom is the one observed on the regional
allocation of decentralized investment funds. Despite that roughly half of these funds are
also geared to develop centrally defined targets, a substantial share of them is freely
allocated by regional and municipal governments (section 5).
7
Table 1
Decentralized Public Funds.
(Mill. of 2002 US$ dollars)
I) Net of Grants Municipal revenues.
% of TDFs
1999
2000
2001
2002
2003
1,252.1
1,269.3
1,287.8
1,338.8
N. A.
31.5
30.3
29.4
27.9
Operation Revenues
52.5
56.3
57.4
60.7
N. A.
Tax Revenues
929.1
957.1
1,005.7
1,049.5
N. A.
Other Revenues
270.5
256.0
224.8
228.6
N. A.
II) Grants
2,719.3
2,915.7
3,097.3
3,459.6
3,635.3
% of TDFs
68.5
69.7
70.9
72.1
N.A
1,669.4
61.4
1,804.7
61.9
1,904.8
61.3
2,174.3
62.8
2,268.5
62.4
479.0
489.8
503.2
513.2
509.4
17.6
16.8
16.2
14.8
14.0
570.9
621.2
689.3
772.1
857.4
21.0
21.3
22.3
22.3
23.6
3,971.4
4,185.0
4,385.1
4,798.4
N.A.
1.
Delegated functions
% of all grants
2.
Social Aid and Local development
% of all grants
3.
Decentralized Public Investment Funds
% of all grants
III) Total Decentralized Funds (TDF: I+II)
% of Grants on TDFs
68.5
69.7
70.6
72.1
N.A
% of TDFs on the General Government’s rev.
29.0
27.8
28.1
30.6
N.A
% of Municipal rev. n the General Government’s rev.
9.1
8.3
8.2
8.4
N.A
Source: Public Budget.
8
Figure 1
Government’s decentralized funds in
Chile
School level Education
School level Education and Primary Health
CENTRAL
GOVERNMENT
Investment
REGION
Investment
MUNICIPALITY
BENEFICIARIES
FCM
Social Programs
9
5.
The case of regions and provinces.
Regions have an important role in the allocation of public investment funds. Both the
amount of these funds as well as a broad definition of the type of projects to be executed
is determined at the central level. With varied degrees of autonomy depending on the
fund at stake, regional governments decide on the specific investments to be made. The
so called National Investment System establishes a procedure to evaluate each separate
project on the basis of its present net social benefit. In the same way as a social discount
rate is determined, shadow prices on the foreign currency and the cost of labor are
recalculated regularly. Three administrative bodies are in charge of the identification
and corresponding proposal of projects to the regional councils (CORE). They are the
municipal councils, the regional branches of specific national ministries (SEREMIS)
and the provincial governors, who are empowered to partially decide on the ranking of
investment proposals. In most cases, the local Secretary of Planing (SERPLAC) makes
the economic evaluation of the project at stake and sends back a report to the regional
government. All municipalities with more than 100.000 inhabitants have a SERPLAC
of their own. Smaller ones appoint a municipal officer who provides the technical
support.
Four categories of funds should be identified (table 2). The most important one is the
National Fund of Regional Development (FNDR) which occupies more than 52% of
the regionally decided public investment (RDPI). It was designed as a mechanism to
standardize the access across regions to public investment funds6. Originally, it was
fully funded by the central government in the context of the so called “traditional
FNDR”. Thereafter, additional funding was provided by the Inter American
Development Bank (IDB). Whilst in principle the FNDR resembles a non categorical
grant to support regionally decided public investment, some minor restrictions and wide
definitions regarding the use of the fund should be considered. Generally, the FNDR is
not allowed to target current expenses, donations to private or public institutions and
financial investments. Concerning the part of the fund being provided by a credit from
IDB, this cannot be used in the building of prisons and other justice sector related
projects. The freely allocated share of the FNDR – which amounts to almost 46% of it is complemented with Provisions that take the form of categorical grants whose destiny
is centrally defined by the ministries involved. . For 2003, fourteen categorical
provisions were assigned to specific uses in a wide range of areas. While the secondary
distribution of the fund as well as the regional allocation to specific projects is finally
decided by the regional level, at least 50% of the projects being prioritized by the
provincial governors should be considered in the regional FNDR investment budget.
The second type of investment grant is constituted by the Specific Sector Regionally
Allocated Investment (ISAR). In this case, donor ministries define the eligibility rules of
the projects being selected. Nevertheless, it is the regional government the one that
decides the interregional allocation of funds. This decision is restricted to consider at
least 80% of the proposals made at the provincial level in the regional ISAR investment
budget. The whole cost of each project is potentially subject to co-funding between the
ministry and the regional government. Four active ISAR funds were available for 2003.
The Ministry of Internal Affairs, through the Undersecretariat of Regional Development
administers an ISAR named Neighborhood Improvement Program, which finances
6
See the Constitutional Organic Law N. 19.175 on the Administration and Government of Regions.
10
basic local infrastructure being generally oriented to extreme poor communities.
Municipal governments have a fundamental role in identifying the potential projects at
the local level, promote the communal social organization, look after the collection of
complementary funds7, make the acquisition or selling of assets involved and improve
the water supply conditions in small communities. The second ISAR is the Urban
Improvement and Rain Water Evacuation Program. This is provided by the Ministry of
Housing. As its name states, it finances new investment, contributes to the maintenance
of old pavements and supports the creation of urban facilities intended to evacuate rain
water. The Ministry of Public Infrastructure offers an ISAR called Rural Drinkable
Water Program, which develops water facilities in rural areas. This program makes the
community responsible for the maintenance of these facilities through the creation of a
Rural Drinkable Water Committee. Finally, the National Sport Institute administers the
Chile-Sports program, which funds the building and improvement of sport facilities.
ISARs’ share in all regional investment funds has been declining systematically since
1999 with a current share slightly higher than 10% for 2003.
Starting in 1996 there began to operate a line of regional investment funding which
gives municipalities the full responsibility to decide on the kind of specific projects to
be made. Two IRALs are currently working. One is the Urban and Communal
Equipment Improvement (PMU). This is administered by the Undersecretariat of
Regional Development and it is intended to fund small projects that generate local
employment and improve resident’s life quality. Among many other initiatives, it is
used to finance sport facilities, sidewalk maintenance, social community centers and
the like. In practice, only 75% of the PMU is strictly allocated as an IRAL, whereas the
remaining 25% is left at the disposal of governors to be used in emergencies. Every
CORE decides which municipalities and in what amounts will receive the funding.
Thereafter, each local council informs the Undersecretariat of Regional Development
about the characteristics of the investments to be made. The second one is intended to
promote local productive development by supporting small entrepreneurs. This is run by
the Social Investment and Solidarity Fund (FOSIS) which operates as a branch of
MIDEPLAN. The fund is named Support Program of Income Generation from
Economic Activities. It covers productive investment, local specialized services, access
to credit and local business environment development.
Projects under the label of Programmatic Agreements are the result of a co-financing
contract between the region and the ministry that sponsors the fund. Investment
proposals should be part of the regional long run development strategy. This is the case
of the Participative Pavement Projects Program, which is intended to reach groups of
urban dwellers who organize themselves into a committee and request the local branch
of the Ministry of Housing to pave a road or install a missing sidewalk. Other similar
funds subsidize the acquisition of houses to workers, small communities and extremely
poor individuals who are either enable to get a minimum saving or have no access to
credit. This is the case of the Special Workers’ Project Program, the Minimum
Standard Social Housing Subsidy and the Chile Neighborhood Program. Specific local
needs are also being served through a special Sport Fund, a River Banks Defense
Program and a Citizens Security Program. Most of them not only finance
improvements in physical infrastructure, but also give technical advice and facilitate the
implementation of cooperative efforts to deal with the targets being pursued.
7
In some case beneficiaries should also make a minimum contribution.
11
Table 2
Decentralized Public Investment Funds
Primary Distributive Criteria
Primary Distribution
Allocation made by the Undersecretary of
Development:




National Fund of
Regional Development
and Provisions (FNRD)

Regional

90% is assigned on the basis of a set of socioeconomic
and territorial indicators.
10% covers emergency situations and it stimulates the
efficiency in the use of the assigned regional budget.
Specific Sector
Regionally Allocated
Investment (ISAR)

It is defined by the donor ministry.
Locally Allocated
Regional Investment
(IRAL)

It is defined by the donor ministry.
Programmatic
Agreements

It is defined by the donor ministry.
As it can be seen from table 2, the only clearly established primary distribution criteria
is the one used for the FNDR. Remaining funds are distributed by the donor ministries
on the basis the regional endowment– and/or observed deficit- in the areas in which a
particular ISAR is meant to be used. Despite this regional distribution mechanism may
be labeled as discretionary, it is far from being “arbitrary” as long as it is based on a
centrally defined set of factors. As far as the genesis of investment proposals, this rests
on those local public institutions geared to capture residents’ needs. Neighbors get
organized in local committees that inform on their specific demands. This information is
either channeled through the local municipality, deconcentrated branches of central
governments’ ministries and/or the regional and provincial governments. With very few
exceptions, proposals are handed over to the regional SERPLAC, which evaluates
projects in the context of the national investment system (SUBDERE 2003). Once this
is given technical approval, it is returned to the regional government which prioritizes
all feasible proposals according to the regional interest and it requests the funding from
the Undresecretariat of Regional Development and other ministries involved. Big
investment projects have to be evaluated by MIDEPLAN directly, which centralizes the
process for the whole public sector.
Despite all these funds being labeled as regionally decided public investment (RDPI),
only the non provisioned share of the National Fund of Regional Development – which
currently amounts to slightly more than 50% of the whole RDPI (see table)- may be
genuinely defined as a non categorical investment grant. Regarding the share of the
RDPI on total public investment, this has increased from about 13% by the beginning of
the 90s, up to a 50.2% in 2003. Such a change responds to the current political will to
favor a more decentralized public investment allocation. The fact of this being a
discretionary measurement implies that nothing precludes such a share from having a
reduction – or a farther increase- in the future (Letelier 2003). Nevertheless, this trend in
the share of RDPI is shown as the most significant recent achievement as far as
decentralization is concerned. Whilst over the last 13 years there has been an active
12
devolution of public investment funds in favor of the regional and the local levels, this
has not been accompanied with a similar evolution as far as the institutional structure is
concerned. Generally, the range of responsibilities and attributions being held by
regional governments continues to be the same since 1993, when regional governments
were formally created.
Table 3
Regionally Decided Public Investment Funds
(Mill. US$ 2002)
1999
2000
2001
2002
2003
FNDR
ISAR
IRAL
Prog. Agreements
256.3
139.0
37.8
137.8
249.7
134.0
52.6
184.9
295.6
141.9
53.7
198.1
355.1
150.6
47.0
219.4
449.3
90.4
40.0
277.8
TOTAL
590.7
621.2
689.3
772.1
857.4
36.9
44.4
46.3
47.3
50.2
Share of NPI (*)
Source: Undersecretary of Regional Development. Ministry of Internal Affairs of Chile.
NPI = National Public Investment.
6.
The case of municipalities.
6.1
Transfers between municipalities.
The structure of grants to municipalities has a compensating mechanism that
redistributes income from the rich to the poor local governments. This operates in a
similar way to the redistribution funds very often observable in Federal Countries,
which is feed by provincial or state taxes, and then assigned by the central government
on the basis of an agreed upon rule. In the case under analysis, this is called the
Common Municipal Fund (FCM), which considers redistributive elements both at the
revenue generating stage as well as in the way to allocate the fund. The purpose of the
FCM is defined in the Constitution as a “solidarity redistributing mechanism of self
generated resources between municipalities”.
Table 4 registers the magnitude of the resources being distributed. The total amount
reached US$ 515 millions in 2003. Recorded years in the table show that this fund has
been rising as a proportion of total municipal expenditures. To an important extent, this
phenomena has been caused by a significant increase in the value and the number of
properties being taxed and the stock of vehicles paying circulation permission between
1999 and 2003, all of them being significant items in collecting the fund (see ANNEX
2). It should be pointed out that in practice the central government’s contribution does
not exist (ANEX 2), what it turns the FCM into a purely redistribution device among
municipalities. By looking at Figures 1 and 2 it may be observed the important degree
of inequity of Chilean municipalities as far as their local governments’ revenues are
concerned. Out of all cases, only 51 were net contributors to the fund in 2002, while the
remaining 290 where net beneficiaries. Another aspect worth noting is that among
contributors, a few of them are very big relative to the rest.
13
Table 4
Common Municipal Fund
(Mill. of US$ 2002)
FCM
Share of FCM on Mun. Exp.
1999
392
31.8
2000
394
30.4
2001
445
34.8
2002
492
37.0
2003
515
36.6 (*)
Fuente: Balance de Ejecución Presupuestaria Municipal de la SUBDERE.
(*) Estimation by the Autor.
Several weaknesses have been detected as far as the operation of the FCM is concerned.
One of them is the fact that regardless of the very few net contributors, all
municipalities are legally committed to give away part of their revenues according to
the rules established in ANNEX 2. Since in most cases they are refunded by an amount
larger than the contribution being made, the whole operation of transferring the money
to the central government and then receive back the corresponding assignment is indeed
a waste of time and resources in itself. Municipal governments very often delay the
payment of their contributions on account of the net benefit they are likely to get. The
net effect of this is that only 58% of the resources being collected by the FCM is strictly
redistributed. The remaining 42% is returned to the contributors. Secondly, it has been
argued that despite this being a “redistributing” device, it also assigns some weight
(10%) to management performance and catastrophic events. Although this appears to be
an important source of revenues for some small municipalities, it is a clear deviation
from the general aim of targeting redistribution. Some of the outliers observed from
Figures 2 and 3 may be explained in light of the FCM not being a purely redistributive
mechanism. Figures also show that most municipal governments are net beneficiaries.
Only 51 out of 341 municipalities were net contributors in 2002. The Undersecretary of
Regional Development is now considering the redesign of the fund. Whilst there is not a
unique proposal on it, all potential improvements are meant to deal with the above
mentioned problems.
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